# Why are banks still so vulnerable to money laundering?
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2018-03-06
Category: BANKING
Category URL: https://financedigest.com/category/banking
Meta Title: Financial Crime Detection in Banks: Uncovering Inefficiencies
Meta Description: Learn how Laura Hutton, Executive Director at Quantexa, discusses the challenges banks face in tackling financial crime and the inefficiencies in Anti-Money
Tags: featured
Tag URLs: featured (https://financedigest.com/tag/featured)
URL: https://financedigest.com/why-are-banks-still-so-vulnerable-to-money-launderinghtml

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_**Laura Hutton**, Executive Director at_ [_Quantexa_](http://www.quantexa.com)

Financial crime is a wide-reaching and prolific issue that banks are struggling to tackle. Laundered money is known to be funding illegal activities, including terrorism, which places banks under immense pressure to identify the source of such funds. All banks have Anti-Money Laundering (AML) systems in place but they are crippled by a variety of different inefficiencies that are allowing criminal activity to remain undetected. In many cases, organised criminals are systemically probing the various weaknesses within these AML systems and are actively capitalising on them in [order to turn the profits](https://www.financedigest.com/computerized-physician-order-entry-cpoe-systems-market-to-generate-profitable-avenues-for-existing-companies-as-well-as-new-players.html "Computerized Physician Order Entry (CPOE) Systems Market to Generate Profitable Avenues for Existing Companies as Well as New Players") of crime into ostensibly legitimate assets.

At first, financial institutions put systems in place to detect [money laundering](https://www.financedigest.com/are-compliance-and-anti-money-laundering-aml-regulations-hurting-your-sales.html "Are compliance and anti-money laundering (AML) regulations hurting your sales?") within their retail book, with other product lines left unprotected. Under increasing regulatory pressures to change this, banks hastily repurposed these [systems into other areas of the business](https://www.financedigest.com/how-to-use-a-pos-system-to-run-your-business.html "How To Use A POS System To Run Your Business?"). Inevitably, these have not been suited to the product line that they are trying to protect, with systems struggling to cope with the complexity of the schemes perpetrated by organized criminals. With access to only a fraction of the available data needed, they use simplistic analysis methods, looking only at typologies dictated by the regulator.

Ineffective systems

Perhaps the [biggest impact](https://www.financedigest.com/reuters-impact-please-put-a-price-on-carbon-says-europes-biggest-utility.html "REUTERS IMPACT-‘Please put a price on carbon’, says Europe’s biggest utility") of this is that systems are ineffective, producing large numbers of low-quality alerts. Essentially, they detect an enormous amount of seemingly anomalous behavior that, when investigated, is found to be unsuspicious. These [systems are providing levels of false positives](https://www.financedigest.com/dynamic-positioning-system-market-notable-developments-geographical-outlook.html "Dynamic Positioning System Market: Notable Developments & Geographical Outlook") that are in excess of 99%, and this is where the inefficiencies arise.

The problem is that under compliance legislation, [banks are legally obliged to investigate every alert](https://www.financedigest.com/finance-brokers-bank-on-red-flag-alert-to-help-beat-fraud.html "FINANCE BROKERS BANK ON RED FLAG ALERT TO HELP BEAT FRAUD") created by their AML system, regardless of how unlikely they may seem. This leads analysts to distrust the detection systems. Often the investigation process is outsourced to [lower cost](https://www.financedigest.com/companies-cost-inflation-is-slowing-but-shoppers-may-wait-for-lower-prices.html "Companies’ cost inflation is slowing but shoppers may wait for lower prices") resources, employed to do basic box-checking processes, thus removing the financial crime knowledge from the investigation process. This is something that criminals have been able to actively capitalize on, and as such, is [becoming an absolute priority for banks](https://www.financedigest.com/becoming-more-than-a-bank-adding-value-through-financial-solutions-as-a-service.html "Becoming more than a bank: adding value through financial solutions as-a-service") in terms of improving their systems.

Entry-level analytics

The use of basic analytics and limited data has prevented [current systems](https://www.financedigest.com/ventricular-restoration-systems-market-development-history-current-scenario-industry-insights-2030.html "Ventricular Restoration Systems Market Development History, Current Scenario & Industry Insights 2030") from being able to make the sort of judgements required to identify well-hidden activity. The data [sets that are available to these banks](https://www.financedigest.com/bank-of-england-set-for-second-hefty-rate-rise-in-a-row.html "Bank of England set for second hefty rate rise in a row") are enormous and, when utilized effectively, can provide useful insight into illegal activity. Yet, this data is not yet made use of – [analysis is conducted across a thin slice of data](https://www.financedigest.com/shock-data-logger-market-2021-outlook-current-and-future-industry-landscape-analysis-2029.html "Shock Data Logger Market 2021 Outlook, Current and Future Industry Landscape Analysis 2029"), solely at the transactional or account level, leaving masses of potentially incriminating data uninterpreted. [Systems look for simple patterns like large cash deposits in short time periods](https://www.financedigest.com/innovation-at-periodic-intervals-to-upscale-the-functional-brain-imaging-systems-market.html "Innovation at periodic intervals to upscale the Functional Brain Imaging Systems Market"). Money [launderers will intentionally hide illegal activities within businesses that have a lot of international transactions going on all the time](https://www.financedigest.com/anti-money-laundering-time-to-take-a-new-approach.html "ANTI-MONEY LAUNDERING: TIME TO TAKE A NEW APPROACH?"). The analytics in [current systems are simply not sophisticated to detect activities](https://www.financedigest.com/automotive-active-safety-system-market-2015-scope-of-current-and-future-industry-2025.html "Automotive Active Safety System Market 2015 | Scope of Current and Future Industry 2025") that have been deliberately concealed.

Inflexible

Aside from their various issues of inefficiency, repurposed AML systems are inflexible and hard to adaptunable to support the addition of new data points, typologies and products. This means they are difficult to improve, withreconfiguration requiring laborious and time-consuming effort. The inflexibility of these [systems leads](https://www.financedigest.com/blood-thawing-systems-market-analysis-growth-opportunities-future-demand-and-leading-players-updates-by-forecast-2030.html "Blood Thawing Systems Market Analysis, Growth Opportunities, Future Demand and Leading Players Updates by Forecast 2030") to an eventual and inevitable degradation of model performance.

In order to combat these issues, top tier banks are embracing new technologies that can [improve efficiency](https://www.financedigest.com/improved-patient-safety-efficient-dose-administration-and-seamless-interoperability-for-advanced-infusion-delivery-are-several-advantages.html "Improved patient safety, efficient dose administration, and seamless interoperability for advanced infusion delivery are several advantages") and effectiveness through use of intelligent analytics and network based solutions.

A new approach

[Money launderers](https://www.financedigest.com/the-problem-with-current-anti-money-laundering-processes-a-lack-of-context.html "The problem with current Anti-Money Laundering processes: A lack of context") are ultimately people and companies, not transactions and accounts. [Banks have thus been able to successfully combat the problems discussed by employing entity resolution and network analysis](https://www.financedigest.com/now-is-the-time-for-banks-to-introduce-intelligent-account-analysis.html "Now Is the Time for Banks to Introduce Intelligent Account Analysis") techniques.These advanced [analytical processes are able to interpret vast data](https://www.financedigest.com/top-5-data-analytics-trends-for-2023.html "Top 5 Data Analytics Trends for 2023") sets, contextualizing seemingly isolated incidents and relationships within wider networks which ultimately helps to unearth cases of intentionally hidden money.

Connections can be extracted from internal and external data, derived from information such as names, contact information, company structures and transactional money flows.These newer analytics are supported by AI and machine learning and are therefore able to recognize patterns amongst confirmed cases of criminal activity and use them to inform interpretations in the future. These new AML [systems are proving to be far easier to rework and are therefore far more reactive to additions of new data](https://www.financedigest.com/interoperability-of-data-to-accelerate-the-ventilator-test-systems-market.html "Interoperability of data to accelerate the Ventilator Test Systems Market") points or typologies. This has allowed [leading banks](https://www.financedigest.com/banks-miners-lead-ftse-100-lower.html "Banks, miners lead FTSE 100 lower") to employ AML solutions that are personalized and adaptable to their individual needs.

AML systems in place across the [banking sector](https://www.financedigest.com/is-automation-key-to-esg-success-in-the-banking-and-finance-sector.html "Is automation key to ESG success in the banking and finance sector?") are outdated and unfit for purpose. An [overhaul of these systems is the only way that banks](https://www.financedigest.com/swiss-press-freedom-dealt-blow-in-bid-for-overhaul-of-bank-secrecy-rules.html "Swiss press freedom dealt blow in bid for overhaul of bank secrecy rules") can hope to effectively tackle the issue of laundering. The current political climate is putting more [pressure on banks](https://www.financedigest.com/hungarys-otp-bank-pressured-by-ukraine-to-sell-russian-unit-ceo-says.html "Hungary’s OTP Bank “pressured” by Ukraine to sell Russian unit, CEO says") to find out how nefarious activities are being funded and how it is so often going undetected. High [levels](https://www.financedigest.com/global-covid-19-cases-hit-250-million-eastern-europe-infections-at-record-levels.html "Global COVID-19 cases hit 250 million, eastern Europe infections at record levels") of erroneously positive alerts are inundating analysts with cases they are legally obliged to investigate which is eating away at the time they can spend investigating the cases that matter. Similarly, as political pressures mount, [money launderers are becoming increasingly intelligent in how they work](https://www.financedigest.com/how-does-hard-money-lending-work.html "How Does Hard Money Lending Work?") and the systems in place are simply not sophisticated enough to keep up with them. Banks that have taken a proactive stance to these glaring issues, embracing a more holistic and flexible approach towards anti-money laundering,are finding it is the obvious solution to a dangerous problem.


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